The Right Price For A New House

It never ceases to baffle me why people think price is some realistic indicator or value. It does not tell you much unless you dig deeper.  Few bother.

New house prices

People don’t address the meaning of house prices because it is very difficult. The data is not there in most cases and that which is there is often specific to a narrow market. You can get a sense of it though.

The question becomes how much should a new home cost?

There are many ways to look at it?

Price

Nominal price. Inflation has made money worth much less. The Consumer price index (CPI) is not an exact measuring tool because it includes many other things than just housing. A house the cost $10,000 in 1950 would cost $107,000 now. Assume that is half house and half land cost.

The fact that a new home today cost much more than that demands an answer to the question, “What else are we buying?”

Size

The house people bought in the 1950s was about half the square footage of today’s offering. While the lot size is not very different, the cost to service has risen. In many urban areas, the land is closer to 60% of the package cost. The $5,000 lot is likely to be more than $60,000 now. In my city that is barely a down payment on a lot. More research needed on this. The larger house should cost double for construction so add another $45,000 to the reasonable price. Except building standards, permits, inspections, are higher and more all add up. All new home require engineer certified drawings and compliance with dozens of bylaws. Not inexpensive.

Amenities

New homes today include more in them than was common in the 1950s. This list of now included and seldom included then came to mind without much trouble.

  • Attached two-car garage
  • Air conditioning
  • Insulation R factor 40 and up
  • Weather proof windows
  • Paved driveway
  • Appliances
  • High quality kitchen cupboards and counter tops.
  • Multiple bathrooms
  • Landscaped lot
  • Construction refinement
  • Architectural detail

By today’s standards, the median house built in the 50s was primitive. Those extras are taken for granted now, but are costly to provide. Back then a new house was likely not even painted, nor were base boards stained. These “extras” would add at least 50% to the price of the building so another $50,000 of today’s money.

The house is now over $200,000.

Cost of ownership

  • Mortgage rates
  • Heating cost
  • Repair costs

I know a realtor who claims people don’t care about the price of a house, they care about the monthly payments needed to live there. Mortgage interest rates today are less than half of what they were in the 1950s and less than 10% of what they were in the early 1980s. People can pay more and have no effect on their disposable income. The same goes for more efficient heating and more easily repaired structures.

Availability

It takes half of forever to get lots approved to build on. You better start young if you are a developer. Scarcity drives up prices. Lots are priced now at least double what other facts would suggest are reasonable. In a country the size of Canada with its sparse population, you would wonder how it is possible to create a land shortage.

Just now materials are more expensive than standard ideas would expect. The pandemic has harmed supply chains and supply/demand has driven prices of necessary components far higher. Lumber in particular has been astounding. I am starting to save wooden toothpicks. Even used, their value is growing. Popsicle sticks are nearly unaffordable.

Demographic changes matter. If you think about it, the only people who affect the prices across and entire sector are first time buyers and last time venders.

Where does that take us?

You cannot compare the $10,000 house from 1953 with the $500,000 house today. They are not the same property, so apples and oranges. A new house today includes far more than the older one did. Cars are much the same. The engine in a 1950 vehicle would not be strong enough to run the peripherals in a modern car. Yet, its gas mileage was about half.

Affordability is the key. How much has household income changed? In the 1950, one person working earning $70 a week was about normal. A house was seen to be expensive at 150 weeks pay. Today, two people are working and even at present prices and interest rates, 150 weeks pay is not so far from reality.

The takeaway

Life is vastly more complex than we like. Superficial facts, while true, often don’t tell the whole story. Think a little deeper and understand what you are getting for your depreciated dollars.

Understand why your money is depreciated and think through what to do about that.

When you understand the flow of the parts, you can make more responsible decisions. Maybe young people, many of whom eschew home ownership, have it right. Old experience, particularly in respect to prices is usually more harmful than helpful.

Economists with access to the data they need in particular areas, could likely find who, if anyone, is getting rich at your expense. I cannot. But, it is an interesting thinking exercise.


I help people have more retirement income and larger, more liquid estates.

Call in Canada 705-927-4770, or email don@moneyfyi.com

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